Why Are Insiders Purchasing This Biotech Stock?

Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Insiders purchase stocks for a variety of reasons. One reason could be that insiders are the ones most familiar with the company's everyday operations and its future prospects. Any such purchase could be viewed as a signal that the stock is expected to perform admirably in the future. This could both be genuine buying by the insider in order to benefit from the stock’s performance or just a way to manipulate other investors into buying the stock, due to the importance accorded to their purchases.

Second, it could be that the insider in question is just trying to accumulate enough stock in order to gain a controlling stake in the company. Third, the insider’s compensation could be plain stock options, and so the insider could be using those options. Moreover, not every investor has the same time frame or rationale as these insiders, therefore not every purchase carries the same degree of importance.

We will examine such a recent purchase in United Therapeutics (NASDAQ: UTHR) and try to figure out the motive behind the purchase. Ms. Martine Rothblatt, CEO of United Therapeutics, purchased almost a million dollars’ worth of shares between Dec. 19 and Dec. 28 of 2012. Earlier; she engaged in similar purchases in December 2011 and June 2012, when the stock was trading in the $40's. The stock is currently trading at $52. United Therapeutics is focused on the development and sales of drugs to cure hypertension like Remodulin, Tyvaso and Adcirca.

Biotech Stocks –  Unpredictable Nature

In biotechnology, the nature of investment is such that short spurts of growth are often separated with long periods of stagnation. For this field in particular, R&D plays a long and tedious role. It is common for companies not to be measured on the basis of their current earnings capabilities, but on the expectation that one day they will be able to return a healthy profit. This is where the conventional wisdom of those on the inside can often be an important signal for investors.

FDA Setback

The company faced a major obstacle before the third quarter, when its tablet form of hypertension treatment got rejected. The stock instantly corrected by over 20%, but the company then announced solid earnings for the quarter. The stock has recently recovered, and the company looks set to push higher.

Financials

United Therapeutics has seen over 20% revenue growth in 2012 and is expecting about 60% EPS growth in Q4FY12. The company is expected to see another 10% growth in revenue in 2013.

It also has a very low debt to equity of 0.26, a very low trailing P/E of 10.5, and a very low forward P/E of 5.5. The price to free cash flow is also very low at 14.70. The average annual earnings growth for the past five years was very high at 19.45%, and the average annual sales growth for the past five years was also very high at 36.02%. The expected average annual earnings growth estimates for the next five years are also a tremendous 24.07%.

Valuation

With a 10.5 P/E, the company is heavily discounted compared to its peers in the industry, which trade at P/E multiples in excess of 20. Even at a more moderate 12 P/E, the stock price will have to grow to around $58 per share. It was arrived at by taking TTM EPS of 4.86 multiplied by the P/E of 12. This shows a strong discount in the stock price.

Even among all the biotech companies that saw recent insider purchases, only Opko Health (NYSE: OPK) had given a marginal positive return in the previous year, apart from United therapeutics which returned nearly 11%.

Conclusion

The stock is in a consolidation phase, and we believe a push to $58 is definitely possible as we near earnings. The company also has limited risk due to exposure to FDA expected news in the near future. 2013 guidance is expected to be a key to the earnings, as it will be important to see what the company says about its tablet drug expectations. Overall, the company seems to be in a definite growth phase.

As regards how important the insider purchases are with respect to this stock, the top management seems to be regularly purchasing the company’s stock, but also selling at higher levels, thus indicating that they believe in the fundamentals, and whenever they fell that the stock is undervalued they buy and sell it at higher valuations. It would be advisable for investors to follow their pattern for this particular stock.


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